Watchdog Blames Geithner For AIG Bonuses

A government watchdog said Wednesday Treasury Secretary Timothy Geithner dropped the ball on the massive bonuses at insurance giant AIG. Neil Barofsky, the special inspector general for the $700 billion financial bailout, told a House panel that "a failure of management" led to the bonuses at the firm that received billions in federal bailout money.

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No paychecks have generated more heat this year than the $165 million in bonuses paid to employees at the insurance giant AIG. Today, a federal watchdog blamed failures of management and oversight at the Treasury Department when it was caught off-guard by those bonuses. The AIG employees are still in line for more bonuses next spring.

NPR's Scott Horsley reports.

SCOTT HORSLEY: So far the federal government has invested more than $180 billion to keep AIG from going under. The company was the leakiest ship in the financial flotilla and it got the biggest bailout by far. So when news broke last spring that taxpayer dollars were being used to pay hefty bonuses to workers in the very division that crippled AIG, New York Congressman Edolphus Towns says the public was justifiably outraged.

Representative EDOLPHUS TOWNS (Democrat, New York 10th District): Don't get me wrong. Americans don't resent people who make a lot of money. We all want to make a lot of money. But what infuriates people is when bosses at bailed-out companies continue to rake in millions. That's the problem.

HORSLEY: Towns chairs a House committee that got an update today from the special inspector general overseeing government bailouts. Neil Barofsky says Treasury Secretary Timothy Geithner was blind-sided by those AIG bonuses. But he didn't let Geithner off the hook.

Mr. NEIL BAROFSKY (Special Inspector General): Secretary Geithner did not learn of these bonus payments until just days before they were made. It was a failure of communications and it was a failure of management.

HORSLEY: Barofsky says Geithner bears ultimate responsibility for the missteps, not only as Treasury Secretary but also because of his previous job. Last fall when the government started putting money into AIG, Geithner was president of the New York Federal Reserve Bank. The Treasury Department relied on the New York Fed to keep an eye on AIG's compensation. But as Barofsky told Ohio Congressman Dennis Kucinich, the New York Fed was more concerned with recovering the tens of billions of dollars the government loaned to AIG than it was with the tens and millions of dollars the company was paying out in bonuses.

Mr. BAROFSKY: What they explained to us was, in substance, they didn't think it was such a big deal. $168 million was a drop in the bucket. Their concern, their focus was on repaying…

Unidentified Man: Think about that bucket.

Mr. BAROFSKY: No, it's a big bucket. This was sort of the outsourcing of oversight to an entity that just doesn't have the political sensitivities, particularly at that time, that you would expect from Treasury.

HORSLEY: Barofsky recommended closer coordination between the Treasury Department and the New York Fed. He also said before putting money into any more companies, the Treasury Department should review the bonus plans itself. A Treasury official said the government has no present intention of buying another financial firm.

Meanwhile, employees in AIG's financial products division are due for another round of bonuses totaling $198 million next spring. Like the earlier bonuses, these payments are a contractual obligation for AIG. But since the federal government now owns nearly 80 percent of the company, Barofsky says it does have some leverage to renegotiate.

Mr. BAROFSKY: And I think a good example of that is in the auto industry, where the federal government made billions and billions dollars of support to Chrysler and to General Motors, but then went back with the threat of bankruptcy to force very significant concessions.

HORSLEY: After the uproar over the last round of bonuses in March, AIG employees agreed to return some of the money, about $45 million dollars worth. Barofsky told Congressman Towns, so far less than half that money has been paid back, as employees hold out for some idea of what will happen with their next round of bonuses.

Rep. TOWNS: So they're holding in ransom.

Mr. BAROFSKY: I think it's the - it's been described to us as a wait-and-see attitude. They want to see what they're going to be getting before they commit or fulfill their commitments to pay back the bonuses.

HORSLEY: Towns recalled the common sentiment when the financial meltdown hit last fall that the party seemed to be over. At AIG, he said, the music is still playing and the musicians are still hanging around.

Scott Horsley, NPR News, Washington.

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Geithner 'Ultimately Responsible' For AIG Missteps

The special inspector general for the government's Troubled Asset Relief Program said Wednesday a "failure" of oversight at the Treasury Department was to blame for regulators' not reining in retention bonuses at American International Group.

Neil Barofsky told the House Oversight and Government Reform Committee that the Treasury Department paid little attention to the executive compensation structure at AIG.

"Our audit concludes that this was a failure," Barofsky testified, saying the Treasury Department abdicated its oversight role to the Federal Reserve. Barofsky said that move turned out to be a mistake "as reflected perhaps most clearly by the fact that its agreement with AIG included no provisions relating to executive compensation."

Barofsky was on Capitol Hill to answer questions about a report released Tuesday that outlines events leading up to AIG's payment of $1.75 billion in bonuses, retention payments and deferred compensation to executives and other workers. About $168 million went to employees of AIG Financial Products, the unit that lead the company to the brink of failure.

In the report, Barofsky wrote that Treasury did not understand AIG's pay structure when it gave the firm billions in aid last fall. On Wednesday, he said that officials at the New York Fed were still struggling with AIG's compensation structure when he finished his audit last month.

Officials discovered 620 bonus programs totaling $455 million, and 13 retention plans allocating $1 billion, according to the report. The company has asked employees to return some of the money voluntarily.

Barofsky criticized the Treasury, under then-Secretary Henry Paulson, for "outsourcing" its oversight duties to the Fed, which he said had different priorities from Treasury.

Barofsky said Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke were aware of AIG's bonus plans, but they were not aware of the size and scope of the bonuses that were going out to AIG employees in March 2009 until shortly before they were paid.

Geithner was president of the New York Federal Reserve in September 2008 when it gave AIG its first bailout, $85 billion. Later, AIG got a bailout of $180 billion from taxpayers.

"Our audit also concludes that Secretary Geithner did not find out, did not learn of these bonus payments until just days before they were made, but this too is a failure. It was a failure of communications, and it was a failure of management," Barofsky told the House panel.

He said some executives at New York's Federal Reserve knew that AIG was contractually obligated to make the bonus payments in the fall of 2008, but they did not alert Geithner.

"What they explained to us was, in substance, they didn't think it was such a big deal — $168 million was a drop in the bucket," Barofsky told lawmakers.

Barofsky's report said the Obama administration's pay czar has asked AIG to withhold some of the millions in bonuses promised to its employees.

Kenneth Feinberg, the special master for executive compensation, has "informally" advised AIG not to pay the full $198 million employees expect to receive, according to the report.

Rep. Marcy Kaptur (D-OH) suggested that the government look for legal ways to force AIG to return some of the money spent on executive compensation.

But Barofsky said that could be difficult. However, he said it is possible that monies could be recovered through forfeiture if a recipient of the bonuses was involved in the fraud that led to a bonus being paid out.

Rep. Darrell Issa (R-CA) faulted Geithner for failing to keep himself apprised of how AIG was spending the money that provided the company's first lifeline.

"We have a secretary of the Treasury who failed to know when he should have known and failed to give us transparency," Issa said. He asked Geithner to meet with the committee to answer questions at a future date.

From NPR and wire reports

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